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Is it worth the operational performance benefits for airlines to let bags fly for free or are ancillary revenues from baggage worth the sacrifice in efficiency? Let’s take a closer look at this Ancillary Services topic - an important revenue generator for airlines.
In a previous post , we highlighted the key trends in airline operations research (OR) which were discussed at the annual AGIFORS Symposium. One of these debates centered around the impact charging for bags has on operational efficiency.
The rise of ancillary revenues
In recent years, airlines have been forced to consider non-aeronautical revenues in response to intense competition on fares, rising fuel prices and the widespread adoption of the LCC 'à-la-carte' revenue model. Checked baggage, seat allocation, meals and in-flight entertainment charges now generate billions in ancillary revenue for airlines. In fact, IATA estimates the figure at over 6% of 2013 global airline operating revenue, with some predicting ancillary revenue could soon reach up to $100 billion per year! In short, for many airlines, fares are now positioned to cover costs whilst ancillary revenues generate the profit.
When baggage fees were introduced, many people expected the number of bags processed would go down, thereby decreasing operational costs. But has this been the case? In fact, is it even possible to isolate the impact checked baggage has on operational performance when many other external factors, such as the weather or late passengers, influence flight operations?
AGIFORS discussion - do baggage fees have a major impact on operational costs?
During the Symposium, Professor Deshpande from the University of North Carolina used publicly-available data to compare the on-time departure performance of several US airlines who implemented checked baggage fees, against Southwest Airlines, who don't charge for baggage. The study showed that charging for the second bag (first one goes free) did improve operations performance as fewer passengers checked in two bags; but, charging for all bags caused delays in payment processing and turnaround times, particularly amongst LCC carriers. Interestingly, the general response from airline participants at the symposium was that the positive revenue impact of ancillary service fees still outweighed the relative knock-on effect on operational costs and efficiency.
How will Amadeus leverage this OR study to support our customer’s evolving business?
OR can help answer questions about how to optimise ancillary revenues: e.g. what is the impact on de-bundling the air fare, what ancillary combinations work best, what is the optimal price, can dynamic ancillary offers be tailored to individual customers? Monique Faure, head of Airline Merchandising Product Management, describes how Amadeus sees the opportunities relating to OR for airline merchandising:
"Today nearly 50% of the sales through Amadeus Airline Ancillary Services are bags; we’ve leveraged data, analytics and models from Operations Research to provide further value through our consulting and IT services and to develop a leading end-to-end merchandising solution for our airlines, even when selling bags on complex multi-carrier itineraries.”
Where is the information that will inform decision-makers about the real potential and cost of ancillary services? It lies in the myriad of available data sources (ancillary usage, bookings, sales, company policies, customer profiles), known as Big Data. Stay tuned for more.